Money Mondays: Why Women Have Lower Credit Scores

Tom: The topic this morning is inequality in credit scores. Tell us about it.

Mellody: Well, Tom, it turns out that pay is not the only place we find disparities between men and women when it comes to financial health. Beyond the numbers on your paycheck, a recent report from the website credit sesame found that women have a lower credit score than men on average. So this morning, I want to talk about these findings, what is driving them, and what the future holds going forward.

Tom: That sounds great. What findings stood out in the report?

Mellody: The story really boils down to the average scores of people versus some of the relevant indicators that impact credit scores. When we take a look at the scores independent of any context, we see that women have an average credit score of 621, compared with an average credit score of 630 for men, based on an analysis of 2.5 million credit sesame users. On top of that, when taking age into consideration, this gap between men and women grows as we get older, from a 7-point difference for 24-36 year olds, to a 15-point difference for those above 65.

While these might not seem like a large or important gap on the surface, when you dig a little deeper, the underlying cause of the gap raise important questions. For example, women have smaller debt loads, on average, when compared with men. Women on average owed $21,171 in overall debt as of January, compared with $25,225 for men. In general, high debt loads are a factor in dragging down your credit score, because lenders prefer that consumers are not using up most of their available credit. That should mean the women would be more likely to have better scores than men. But, after finding the conflicting numbers confusing, the authors of the report hit upon a likely culprit.

Tom: What did they conclude?

Mellody: That it makes sense in the context of the gender pay gap. For one, a bigger paycheck could leave men with more cash left over after the bills are paid — even if they have bigger debt payments. For example, 18% of women reported earning more than $75,000, while 23% of men said the same. These differences can result in a lower debt-to-income ratio, a measure that lenders consider when deciding whether they think a borrower can afford to pay back a loan, or improved access to low-interest borrowing, which can drive down monthly costs. So, while income is not directly tied to a person’s credit score, it is critical to a person’s ability to managed their credit well, which does lead to higher credit scores. That something as important as a credit score is impacted by the pay gap is unsettling.